Pittsburgh a nurturing place for energy start-ups, spin-outs

Early-stage, energy-oriented companies are a hot ticket and topic in local economic development circles, as an infrastructure is evolving locally to nurture spin-outs and start-ups.

Last year, Innovation Works looked at 106 energy investment opportunities and funded 16, said Tim Fogarty, director of energy programs.

Innovation Works provides funding to energy tech companies already developed by entrepreneurs, as well as companies it helps to create based on technology developed at universities and local industrial businesses. The program is a five-year, $10 million state-funded initiative, Fogarty said.

“You see what these companies are doing and sometimes you’re just dumbfounded,” Fogarty said.

Efforts to encourage development of companies in the energy sector go back to the university research level. The University of Pittsburgh and Carnegie Mellon University are forces on their own, but they’re also part of a consortium of five universities — the others are Virginia Tech, West Virginia University and Pennsylvania State University — partnering on research with the National Energy Technology Lab.

“We just completed the first spin-out of a NETL technology new company, Pyrochem Catalyst Corp.,” Fogarty said.

Pyrochem applied for an exclusive license to NETL’s technology to design a reforming and/or combustion catalyst system for the reforming of hydrocarbon fuels.

“It’s largely virtual,” Fogarty said. “We’re identifying managers outside the region and providing support as we develop the strategic plan, with the idea of building relationships for the manufacturing of this material in southwestern Pennsylvania.”

POW Solutions, which expects to spin out of CMU this spring, follows the more traditional university-nurtured profile of many of the region’s tech start-ups.

POW is developing an enterprise-level software that helps IT data centers to save power or increase performance without the need for additional power. To date, it has received more than $250,000 in funding from a plethora of sources: Project Olympus, the Technology Collaborative, CMU’s Center for Technology and Enterprise Creation, the Kauffman Foundation and Innovation Works.

“However, for these companies to grow and mature, the region must also retain talent and continue to attract follow-on investment, as energy can be a capital-intensive business,” Mechler said.

In fact, the energy start-ups have the same capital needs as their software counterparts.

“Funding is always going to be an issue,” Fogarty said.

John Taylor, National Venture Capital Association research and financial affairs executive, said the technology investment climate across the country is “really an ecosystem,” with the early-stage network readying the company for later-stage support.

Later-stage investing

While the region has yet to see a venture capital fund specifically focused on energy, national investments are growing.

The clean tech sector, which includes alternative and renewable energy, accounted for $3.8 billion of the total $21.8 billion in invested by venture capitalists last year, according to the MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association, based on Thomson Reuters data. Clean tech dollars were up 76 percent over 2009, and the 267 deals were up 37 percent from the previous year.

“Money is being raised,” Taylor said. “It’s considered an attractive area. But the venture industry as a whole is looking for IPOs and some successes so they can exit investments and pay off investors from the prior fund so they can raise additional money.”

There are funds specializing in clean tech, and many focusing on sub-sectors within it, he said.

“But a lot of the money in follow-on rounds will be made by the large, generalized funds in the $250 million to $750 million range,” Taylor said.

Birchmere Ventures, a South Side-based venture capital firm, has a clean tech practice led by partner Ned Renzi that has invested in three companies, two of which are in California.

But Birchmere’s involvement in the energy sector really started with leading Harmar-based Plextronics Inc.’s 2006 series A financing round.

Plextronics, developer of printed electronics technology that enables low-cost organic solar cells and high-efficiency lighting, may be the region’s poster company in the energy technology sector. It was founded in 2002, a CMU spin-out based on using conductive polymer technology, and has had several successful capital raises, most recently a $14 million round in fall 2009. Its investors include a mix of locals — Downtown-based venture capitalist Draper Triangle Ventures, private investor Newlin Investment Co. and economic development entity Innovation Works — plus Palo Alto, Calif.-based Firelake Strategic Technology Fund and Brussels-based international chemical and pharmaceutical group Solvay.

“That’s very typical,” Taylor said. “These companies need to bring in larger firms. A VC fund will typically invest where the expertise of their partners are. What we’re seeing is the geography matters less, especially if the large funds on the coast have a local firm they’re working with, they’ll certainly consider deals in the market.”

Fogarty said another route to growing the energy community here is by helping Pittsburgh-area industrial companies to develop technology that can be licensed to create a new business or a new product line internally. An example is Cannon Boiler Works, New Kensington.

“They make an industrial scale boiler and they have a nice business,” Fogarty said. “And they stumbled into a gas technology that would increase the energy efficiency for a boiler.”

Help from IW and Catalyst Connection enabled Cannon to license the technology and develop the new product.

Energy is a primary focus of the TechBelt Initiative, a four-year-old collaboration among organizations in Ohio, West Virginia and western Pennsylvania, including the Allegheny Conference on Community Development, to spur regional economic development growth. Last summer, TechBelt Initiative’s effort to obtain nearly $130 million from the Department of Energy to create an energy regional innovation cluster was not successful, but it has brought in other grants to build opportunities.

The commonwealth is allocating money toward building companies around specific energy sectors. As an example, in late January, Pennsylvania’s Department of Community and Economic Development awarded $4 million in energy technology grants, including $600,000 to support the Electric Power and Energy Research Commercialization project at the University of Pittsburgh.

Last year, the McCune Foundation and RK Mellon Foundation provided early funding to the Renewable Manufacturing Gateway, a Downtown-based nonprofit merchant bank that is focusing on financing clean energy and tech companies that would use the region as their manufacturing base. RMG plans to help these companies obtain financing. It expects to become self-sustaining through investment returns and fees assessed after successful transactions.

The Urban Redevelopment Authority of Pittsburgh’s Entrepreneur Fund provides up to $200,000 in financing for new and growing emerging technology-based firms, including those in the energy sector. “URA does not currently have any energy start-up companies in our portfolio,” said John Burke, senior business development specialist. “We are interested in pursuing investments in this important industry sector.”